No company can survive without an able owner, executive, or shareholder at the helm. In the event of a key member’s sudden death, illness, or retirement, businesses are often left scrambling to recover lost assets and find a replacement. Large corporations and small businesses alike can avoid a tumultuous transition by creating a succession plan with a knowledgeable attorney.
Without a Plan
If an owner, executive, or shareholder does not have a succession plan in place, his or her stake in the company is either passed on to relatives as part of the estate, absorbed by other shareholders, or a combination of the two.
In family-owned businesses, disputes may occur between siblings and other relatives. Those more active in the day-to-day operations of the business may feel entitled to larger shares than others who are less involved.
In larger corporations, employees and clients may leave the company for fear of instability, shareholders may not be able to buy out the extra shares, and temporary replacements may not be equipped to lead the company through such a delicate time. In addition, if a spouse or other relative inherits the shares of the deceased owner, disputes between shareholders may occur, stalling progress and possibly leading to a loss of assets.
With a Plan
An attorney with expertise in business and estate planning can help owners and shareholders make a plan to ensure a smooth transition. Plans are customarily created after employees, coworkers, other shareholders, and family members have been consulted and after goals for the future of the company have been outlined. Though succession planning can be tailor-made to fit any business model, it typically involves either retention or buy-sell retention.
- Retention Planning involves keeping the business or shares within the family. With a retention plan a spouse, children, or other relatives will retain control of assets.
- Buy-Sell Retention Planning offers the other shareholders or vital employees a larger stake in the company. Interested parties stipulated in the plan will be granted the right of first refusal, or the ability to accept or reject the shares before they are offered to individuals outside of the company. The price of the shares will be determined by a valuation mechanism agreed upon during succession plan negotiations. For example, a valuation mechanism may require that shares be offered for their prevailing full market value, or require multiple professional business valuation appraisals.
Properly drafted succession plans provide the remaining members of the company with a procedure to follow in case the unexpected happens. Planning can designate a competent successor, a successor will be named who will be able to guide the business through the transition, reassure employees about their job security, and put safeguards in place to protect the company from loss. A pension or retirement fund may also be written into the plan.
Other arrangements can be made that would transfer the owner or executive’s interest into trusts to be paid out to family members. Assets may also be divided among employees or in other cases, it may be best to sell the company. With so many factors to consider, it is important that you consult an experienced business planning attorney who can understand all of the interests at stake and work with you to protect them.